Africa ETFs: African economies begin to roar

Dec 19th, 2011 | By | Category: Equities

Almost 12 years ago the Economist newspaper labelled Africa “the hopeless continent”. At the time, the continent was ravaged by corruption, mismanagement, war, poverty and disease. Peacekeeping missions had degenerated into shambles. Elections were a farce.  Aid and development efforts, though saving lives, delivered few lasting economic gains. No matter how much Western governments invested in the continent, little progress ever seemed to be made.

Africa ETFs: African economies begin to roar

Africa begins to roar: IMF expects the African economy to grow by 6% this year and next.

Today, analysts paint an optimistic picture of Africa and offer a much more upbeat outlook. Indeed, the Economist recently updated its view of Africa – no longer is Africa the hopeless continent, it is instead “the hopeful continent”.  The IMF is positive too; it expects Africa to grow by 6% this year and nearly 6% in 2012.

Over the past decade six of the world’s ten fastest-growing countries were African. And while East Asia has received the lion’s share of investment recently, the real lion has been Africa which has grown faster in eight of the past ten years. In fact, Africa’s economies are consistently growing faster than those of almost any other region of the world.

A number of statistics other than headline growth rates reveal an increasingly bright economic story. Labour productivity, for example, has been consistently rising; trade between Africa and the rest of the world has trebled since 2000; inflation has slowed from a heady 22% in the 1990s, to a more moderate 8% average over the past decade; foreign debt and budget deficits have declined too.

Though severe income disparities exist throughout the continent, a middle class – or rather consumer class – is also beginning to emerge. Some 60m African households now have annual incomes greater than $3,000 and this number is expected to grow to 100m by 2015. While this may be minor by Western standards, it is approximately equivalent to India today and represents a progressively lucrative market.

Looking forward, Africa boasts further potential. Key to this is demographics. Africa’s population is set to double, from 1 billion to 2 billion, over the next 40 years. Moreover, as the population grows, the population structure will evolve for the better. The so-called population pyramid that human geographers talk about will bulge with working-age people. The median age in Africa is now 20, compared with 30 in Asia and 40 in Europe. With fertility rates dropping – a consequence of more children surviving longer – that median will rise as today’s mass of young people moves into its most economically productive years. The ratio of people of working age to those younger and older—the dependency ratio—will improve. This “demographic dividend” has been fundamental to the development of East Asian economies and offers huge opportunity for Africa today.

FEATURED AFRICA ETFs/ETNs

DB X-tracker MSCI EFM Africa Top 50 Index ETF

RBS MSCI EFM Africa ex South Africa ETF

Van Eck Market Vectors Africa Index ETF

Standard Bank Africa Equity Index ETN

Technology has also played a part in Africa’s recent economic growth – and will continue to do so. Mobile subscriptions in Africa rose from 54m to almost 350m between 2003 and 2008, then the quickest growth rate in the world.  In the three years since then, mobile phone penetration has advanced to well beyond 50%, and more than 600m Africans now have a mobile. Importantly, perhaps 10% of these have mobile internet access. Improved communications boost productivity and facilitates deal making.

Technology is also aiding health care. A World Bank report said that malaria was wiping $12 billion off Africa’s GDP every year. However, thanks to the proliferation of bed nets, death rates have fallen by 20%. Incidence of new AIDS infection is also dropping, and many more people are receiving effective treatment. Apart from the obvious human benefits, this is having a dramatic effect on productivity and investment.

All this progress is coming at a time when the continent is basking in a period of relative political stability (notwithstanding, of course, the ‘Arab Spring’ currently blowing through North Africa). And while Africa is not entirely peaceful and democratic, it has made significant steps forward. Dictators are gradually being pushed aside and civil wars, such as those that afflicted Angola and Sierra Leone, have mostly ended. Two out of three African countries now hold elections.

And then there is the boom in commodities. In terms of natural resources, Africa is the most abundant continent on earth. The rally in commodity prices, fuelled by strong demand from emerging economies such as China and India, is expected to continue and will further drive growth in Africa. In tapping into African resources, these countries are building new roads, railways and ports. This investment in infrastructure will continue to pay off long after the natural resources have gone – though they show no sign of running out anytime soon.

All in all, the outlook for Africa is far brighter than the Economist’s gloomy assessment of over a decade ago. Sure, there will be ups and downs, but the trend is overwhelmingly positive. With many of the developed economies burdened by debt and austerity, Africa offers an exciting growth opportunity.

Investing directly in African equities can be difficult (and occasionally hazardous). Fortunately, as shown below, there is a growing list of ETFs and ETNs to play this theme.

Pure Africa

DB X-tracker MSCI EFM Africa Top 50 Index ETF
Provides exposure to South Africa, Egypt, Nigeria and Morocco.

Van Eck Market Vectors Africa Index ETF
Provides exposure to companies that are headquartered in Africa or that generate the majority of their revenues in Africa; includes holdings in South Africa, Nigeria, Morocco, Egypt and Kenya.

RBS MSCI EFM Africa ex South Africa ETF
Provides exposure to Egypt, Nigeria, Morocco, Kenya, Tunisia and Mauritius

Standard Bank Africa Equity Index ETN
Provides exposure to a diversified basket of shares across 28 African counties.

South Africa

iShares MSCI South Africa ETF

HSBC MSCI South Africa ETF

RBS Market Access FTSE/JSE Africa Top40 Index ETF

Lyxor ETF South Africa (FTSE/JSE Africa Top 40)

Europe, Middle East and Africa (EMEA) Emerging Markets

Credit Suisse MSCI Emerging Markets EMEA ETF
Provides exposure to African emerging markets including Egypt, Morocco and South Africa, as well as other emerging markets across Europe and the Middle East.

Source FTSE Emerging EMEA 40 ETF
Provides exposure to South Africa (largest country weight), as well as other emerging markets across Europe and the Middle East.

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